Record fall in oil prices threatens Russian budget

According to the study by Citigroup, in order for the Russian budget to be balanced in 2014, Russia needs a price of $105 a barrel, Iran needs $130, and Saudi Arabia and Qatar $89 and $71, respectively. Source: AFP / East News

The price of Brent oil has tumbled to $92.2 a barrel, placing the Russian federal budget in jeopardy. Russian analysts believe that the decrease in oil prices is related to demonstrations in Hong Kong, the strengthening of the dollar, as well as the drastic growth in oil production in the OPEC countries and the U.S.

The record slump in oil prices is threatening the
Russian federal budget: During trading on October 2 the price of Brent oil dropped
to $92.2 a barrel, marking the biggest fall since the 2008 crisis, when the
price of oil was as cheap as $38.4 a barrel. The price of Brent has fallen by
19.9 percent since June 2014.

"The abundance of oil on the market due to the
increase in production in the U.S. and weak consumption in the world are driving
prices down in the current year, which is obviously raising concern in
Russia," says Ivan Kapitonov, deputy director of the Faculty of
Governmental Regulation of the Economy at the Russian Academy of Sciences.

Kapitonov also says that a further decrease in
prices is disadvantageous both for America as the biggest oil consumer and for
American goods producers, since in this case shale oil
projects will no longer be profitable.

According to estimates from the American Energy
Information Administration, in 2015 oil production in the U.S. will increase by
14 percent, from 8.53 million barrels a day in 2014 to 9.53 million barrels in
2015.

Furthermore, in September 2014 the OPEC countries
produced a two-year maximum amount of 30.96 million barrels a day.

Negative influence

The decrease in oil prices negatively reflects on
the balancing of the Russian federal budget, since its profit percentage is
linked to oil prices. According to the Ministry of Finances, the budget will be
balanced only if oil prices reach the level of $96 a barrel of Brent.

“It can confidently be said that the average oil
price in 2014 will allow the Russian budget to be deficit-free," says Alexei
Kozlov, chief analyst at UFS IC.

"Moreover, we do not expect the cost of black
gold to decrease this year below the minimal price fixed on September 2,” he
said.

However, according to an alternative study by
Citigroup, in order for the Russian budget to be balanced in 2014, Russia needs
a price of $105, Iran needs $130, and Saudi Arabia and Qatar $89 and $71,
respectively.

Kozlov notes that the market is dependent on the
agreement between the P5+1 (a group comprised of the five permanent members of
the UN Security Council – the U.S., Russia, China, the UK and France – plus
Germany) and Teheran on Iran's nuclear program.

"We cannot exclude the factor of oil price
manipulation and the artificial increase of supply with the aim of pressuring
Russia," he says.

However, in Kapitonov's view, in order to achieve
this, Russia's potential enemies would have to make an arrangement with all the
OPEC countries – which, fearing a further price decrease, have already begun
reducing production volumes.

Finding a solution

Currently, as Kapitonov says, OPEC's oil production
structures are undergoing important changes, which reveal the discomfort caused
by the existing price levels. In particular, Saudi Arabia has reduced
production volumes and plans on returning prices to the threshold of $100 a
barrel.

"With further decreases, below $90 a barrel,
OPEC members may express the need to reduce the quotas within the whole
bloc," notes Kapitonov, who adds that the next OPEC session will take
place on Nov. 27 in Vienna, but in the case of further negative events in the
market, an earlier session can be organized.

According to Anton Soroko, an analyst at investment
holding Finam, the strengthening of the U.S. dollar is playing against oil
prices. In particular, the U.S. Federal Reserve System is concluding its program
of quantitative easing and in 2015 it plans to increase rates, while the
European Central Bank has only just announced its quantitative easing program.

"There is a decrease in prices also in gold,
silver and other nonferrous metals, which is also related to the growth of the
dollar," says Soroko. "The cost of the American currency is at its
maximum since 2010."

According to Alexei Kozlov, the demonstrations in
Hong Kong, which may negatively affect the growth of the Chinese economy - an
economy that is the biggest consumer of oil in Eurasia – are putting heavy
pressure on the cost of oil.

Investors, estimating a reduction of oil
consumption in the world's second-largest economy, are already factoring their
expectations into the prices, remarks Kozlov.